UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 2002
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to __________.
Commission File No. 333-3074
NEXLAND, INC.
-------------
(Exact name of registrant as specified in its charter)
DELAWARE 37-1356503
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1101 BRICKELL AVENUE, NORTH TOWER, SUITE 200, MIAMI, FLORIDA 33131
- ------------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305-358-7771)
--------------------------------------------------- --------------
(1) Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and
(2) has been subject to such filing requirements for the past 90 days
[X] Yes [ ] No
As of November 1, 2002, there were 34,853,385 shares outstanding of
issuer's common stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
3
TABLE OF CONTENTS
-----------------
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001 (Unaudited).......................................F - 1
Condensed Consolidated Statements of Operations for the three months
ended September 30, 2002 and 2001 and the nine months ended
September 30, 2002 and 2001 (Unaudited).............................F - 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 (Unaudited).......................F - 3
Notes to Condensed Consolidated Financial Statements.........F - 4 through F - 7
4
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
===================================================================================================
ASSETS
------
SEPTEMBER 30, DECEMBER 31,
2002 2001*
------------ ------------
Current assets:
Cash $ 84,375 $ 39,901
Accounts receivable 506,774 113,739
Inventory 899,062 319,482
Prepaid expenses 43,082 -
----------- -----------
Total current assets 1,533,293 473,122
Property and equipment, net 72,864 62,503
Other assets:
Deposits and other assets 28,727 32,968
Loan closing cost - 41,960
----------- -----------
Total other assets 28,727 74,928
----------- -----------
Total assets $ 1,634,884 $ 610,553
=========== ===========
LIABILITIES AND CAPITAL DEFICIT
-------------------------------
Current liabilities:
Accounts payable $ 1,050,692 $ 200,018
Accrued professional fees 108,277 282,093
Accrued expenses 381,358 285,309
Due to related party supplier 619,481 666,209
Convertible debentures - 255,000
Other liabilities 97,356 97,356
----------- -----------
Total current liabilities 2,257,164 1,785,985
----------- -----------
Commitments and contingencies
Capital deficit:
Preferred stock, $0.0001 par value; 10,000,000 shares
authorized; no shares outstanding - -
Common stock, $0.0001 par value; 50,000,000 shares
authorized; 34,853,385 and 35,653,385 shares issued and
outstanding at September 30, 2002 and December 31, 2001 3,485 3,566
Additional paid-in capital 3,923,666 3,775,418
Unearned compensation - (83,340)
Accumulated deficit (4,549,431) (4,871,076)
----------- -----------
Total capital deficit (622,280) (1,175,432)
------------ -----------
Total liabilities and capital deficit $ 1,634,884 $ 610,553
============ ===========
*The balance sheet at December 31, 2001 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
F - 1
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
====================================================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
----------- ------------ ----------- -------------
Sales $ 3,181,986 $ 739,847 $ 6,038,173 $ 2,275,018
Cost of sales 1,802,858 285,647 3,156,262 1,110,131
----------- ----------- ----------- -----------
Gross profit 1,379,128 454,200 2,881,911 1,164,887
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 795,742 903,731 2,201,808 2,785,332
Depreciation and amortization 6,137 4,266 15,419 9,917
----------- ----------- ----------- -----------
Total operating expenses 801,879 907,997 2,217,227 2,795,249
----------- ----------- ----------- -----------
Income (loss) from operations 577,249 (453,797) 664,684 (1,630,362)
----------- ----------- ----------- -----------
Other expense:
Interest expense (183,681) (3,428) (264,661) (79,563)
----------- ----------- ----------- -----------
Total other expense (183,681) (3,428) (264,661) (79,563)
----------- ----------- ----------- -----------
Net income (loss) before extraordinary item 393,568 (457,225) 400,023 (1,709,925)
----------- ----------- ----------- -----------
Extraordinary item:
Loss on extinguishment of debt - - 78,378 -
----------- ----------- ----------- -----------
Net income (loss) $ 393,568 $ (457,225) $ 321,645 $(1,709,925)
=========== ============ =========== ============
Net loss per common share,
basic and diluted $ 0.01 $ (0.01) $ 0.01 $ (0.05)
=========== ============ =========== ============
Weighted-average number of 35,009,907 36,153,385 35,436,535 36,117,923
common shares =========== ============ =========== ============
See accompanying notes to condensed consolidated financial statements.
F - 2
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
========================================================================================================
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2002 2001
---------- -----------
Net cash provided by (used in) operating activities $ 365,876 $ (860,319)
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (25,723) (16,677)
---------- -----------
Cash flows from financing activities:
Loan proceeds - 702,000
Proceeds from exercise of warrants and options - 17
Proceeds from issuance of convertible debentures - 255,000
Costs on issuance of convertible debentures - (41,960)
Return of common stock 81 -
Extinguishment of debentures (295,760) -
---------- -----------
Net cash provided by (used in) financing activities (295,679) 915,057
---------- -----------
Net increase in cash 44,474 38,061
Cash, beginning of period 39,901 59,523
---------- -----------
Cash, end of period $ 84,375 $ 97,584
========== ===========
Supplemental Cash Flow Information:
- ----------------------------------
Cash paid for interest $ 173,891 $ 79,580
========== ===========
Cash paid for taxes $ - $ -
========== ===========
Cash paid for extraordinary item - extinguishment of debt 36,418 $ -
========== ===========
Non Cash Supplemental Information:
- ---------------------------------
Compensation expense in connection with employment agreement $ 83,340 $ 124,988
========== ===========
Expenses in connection with stock options and stock issued $ 121,043 $ -
========== ===========
See accompanying notes to condensed consolidated financial statements.
F - 3
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - FINANCIAL STATEMENTS AND INTERIM PERIOD
- ------------------------------------------------
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and Regulation SB.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals), which are necessary for a fair presentation for the periods
presented, have been included. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2001. The results of operations for the nine months ended
September 30, 2002 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 - STOCK OPTIONS
- ----------------------
In July 2002, the Company granted 541,667 options to certain consultants. The
weighted average grant-date fair value was $0.19 for options with an exercise
price equal to the market price on the date of the grant. The weighted average
fair value of options granted is estimated on the date of the grant, using an
option-pricing model for public companies. The $104,167 fair value of the grant
was expensed in July.
During the nine months ended September 30, 2002, the Company cancelled options
to purchase 616,000 shares of the Company's common stock to certain employees of
the Company and granted options to purchase 154,000 shares of common stock to
these same employees of the Company. The Company accounted for this cancellation
and re-issuance of shares under Financial Interpretation No. 44 recognizing
approximately $3,000 in compensation expense. During the nine month period ended
September 30, 2002, the Company granted 200,000 options to certain consultants.
The weighted average fair value of options granted during the nine months ended
September 30, 2002 is estimated on the date of the grant, using an
option-pricing model for public companies. The weighted average grant-date fair
value was $0.26 for options with an exercise price equal to the market price on
the date of the grant. All options have an exercise price equal to the market
price on the date of grant. During the nine month period ended September 30,
2002, the Company also granted 450,000 options to certain officers and
directors. The weighted average grant-date fair value was $0.13 for options with
an exercise price equal to the market price on the date of the grant. All
options have an exercise price equal to the market price on the date of grant.
The Company has elected to account for the stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized on the employee stock options. The Company accounts for stock options
granted to consultants under Financial Accounting Standards Board Statement No.
123, "Accounting For Stock-Based Compensation."
The fair value of each option is estimated on the date of grant using the fair
value-pricing model with the assumption:
Risk-free interest rate 6.0%
Expected life (years) 10
Expected volatility 6.06
Expected dividends None
F - 4
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2 - STOCK OPTIONS, continued
- ---------------------------------
Had the compensation expense for the employee stock options been determined
based on the fair value of the options at the grant date consistent with the
methodology prescribed under Statement of Financial Standards No. 123,
"Accounting for Stock Based Compensation", the Company's net income for the nine
months ended September 30, 2002 would have changed.
The Company's net income and loss per share would have been reduced to the pro
forma amounts indicated below:
2002 2001
------------- -------------
Net loss
As reported $ 321,645 $ (1,709,925)
============= =============
Pro forma $ 229,365 $ (2,352,325)
============= =============
NOTE 3 - EXTINGUISHMENT OF DEBT
- -------------------------------
In June 2002, the Company prepaid the holders of certain privately placed
convertible debentures in an aggregate amount of $312,000. These payments were
made out of available cash. Interest accrued on these convertible debentures at
6% was $16,240. In connection with this transaction, the Company was required to
pay prepayment penalties of $40,760, and wrote off the unamortized deferred
financing costs of approximately $37,618. The total of $78,378 has been recorded
as a net extraordinary loss in the 2002 statement of operations.
NOTE 4 - INCOME TAXES
- ---------------------
The Company has not recognized any benefit of net operating loss carryforwards
in the accompanying financial statements in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," as the realization of this deferred
tax benefit is not more likely than not. A 100% valuation allowance has been
recognized to offset the entire effect of the Company's net deferred tax assets.
NOTE 5 - CONCENTRATIONS
- -----------------------
During the nine months ended September 30, 2002, approximately 66% of the
Company's revenues were generated by one customer in the technology sector and
none in the same period in 2001.
NOTE 6 - COMMON STOCK
- ---------------------
On November 22, 2000, the Company entered into a settlement agreement in which
it agreed to dismiss a threatened lawsuit against Fred Schmid, Fred Schmid,
Inc., Dale Runyon, a former principal shareholder of WindStar, and Erik Nelson
(WindStar parties), and to terminate Mr. Schmid's consulting agreement. In this
connection, Messrs. Schmid and Nelson agreed to escrow the consulting shares and
the penalty shares with an Escrow Agent and Mr. Runyon agreed to return 800,000
transfer shares of common stock that were issued to him in a prior year. In July
2002, the agreement was deemed to be fully performed and the Company recorded
the return and cancellation of these shares.
F - 5
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - GOING CONCERN
- ----------------------
The accompanying condensed consolidated financial statements were prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of operations. Since
inception, the Company has been involved in the development of its Internet
sharing devices organizational infrastructure, and the performance of
preliminary marketing and sales. The Company's ultimate ability to attain
profitable operations is dependent upon obtaining additional financing or to
achieve a level of sales adequate to support its cost structure.
Accordingly, there are no assurances that the Company will be successful in
achieving the above plans, or that such plans, if consummated, will enable the
Company to obtain profitable operations or continue as a going concern.
NOTE 8 - SUBSEQUENT EVENTS
- --------------------------
On November 6, 2002 multiple agreements were signed to renegotiate related party
accounts payable balances to Promissory Notes, purchase assets and to grant to
Nexland, Inc. the option to purchase worldwide distribution rights and all
claims of technology development.
Promissory Note Agreements
- --------------------------
An agreement and release was signed with Smerwick, a related party and major
stockholder, to release an account payable balance of $313,016 in consideration
of a cash payment of $150,000 and the execution of a Promissory Note in the
amount of $163,016. The note will accrue interest at a rate of 8% per annum with
principle and interest payments of $7,500 monthly in arrears.
An agreement and release was signed with Longfield, a related party and major
stockholder, to release an account payable balance of $306,465 in consideration
of a cash payment of $150,000 and the execution of a Promissory Note in the
amount of $156,465. The note will accrue interest at a rate of 8% per annum with
principle and interest payments of $7,500 monthly in arrears.
Purchased Assets Agreement
- --------------------------
An asset purchase agreement was signed with Nexland Asia Limited, a related
party and major stockholder, to purchase all of the properties, rights,
interests and other tangible and intangible assets of Nexland Asia Limited.
In consideration of the purchase, a promissory note was signed in the amount of
$470,000 bearing an interest rate of 6% per annum. The entire principal amount
and all accrued interest shall be due and payable upon the earlier of the tenth
anniversary date of the note or a sale of substantially all of the assets of
Nexland, Inc.
The principle amount shall become immediately due and payable upon any
bankruptcy proceedings or change of control. In addition, if the Company records
at the end of any fiscal year accumulated shareholder equity in excess of two
million dollars, the note shall become due and payable 45 days following the
filing of the SEC report.
Irrevocable Option Agreement
- ----------------------------
An irrevocable option agreement was signed with Nexland, S.A. to purchase assets
of Nexland, France upon the election of Nexland, Inc. Assets shall include all
of the properties, rights, interests and other tangible and intangible assets of
Nexland, S.A.
F - 6
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8 - SUBSEQUENT EVENTS, continued
- -------------------------------------
As consideration for the option, Nexland, Inc. will deliver to Nexland, S.A.
25,000 newly-issued shares of Nexland Common Stock.
As consideration for the sale of assets upon execution of the option, Nexland,
Inc. will deliver to Nexland, S.A. 1,475,000 newly-issued shares of Nexland
Common Stock.
F - 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This filing contains forward-looking statements, including statements
regarding, among other things, (a) the growth strategies of Nexland, Inc. (the
"Company"), (b) anticipated trends in the Company's industry, (c) the Company's
future financing plans and (d) the Company's ability to obtain financing and
continue operations. In addition, when used in this filing, the words
"believes," "anticipates," "intends," "in anticipation of," and similar words
are intended to identify certain forward-looking statements. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of changes in trends in the economy and
the Company's industry, reductions in the availability of financing and other
factors. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this filing will in fact occur.
The Company does not undertake any obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
GOING CONCERN
The Company's auditors stated in their reports on the financial
statements of the Company for the years ended December 31, 2001 and December 31,
2000 that the Company is dependent on outside financing and has had losses since
inception that raise substantial doubt about our ability to continue as a going
concern. For the years ended December 31, 2001 and 2000, the Company incurred
net annual losses of $1,667,202 and $2,876,244, respectively, and the Company
had an accumulated deficit of $4,871,076 and $3,203,874, respectively.
Management believes that resources will be available from private and operating
sources in 2002 to continue the marketing of the Company's Internet sharing
devices. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
Management has established plans intended to increase the sales of the
Company's products. Management intends to seek new capital from new equity
securities offerings to provide funds needed to increase liquidity, fund growth
and implement its business plan; however, no assurance can be given that the
Company will be able to raise any additional capital.
SIGNIFICANT PLANT OR EQUIPMENT PURCHASES
We do not currently anticipate any significant plant or equipment
purchases during the next twelve months.
CHANGES IN THE NUMBER OF EMPLOYEES
We currently have twenty six (26) employees in Miami and six (6) in
Canada. We anticipate hiring one (1) additional employee during the remainder of
2002. We believe that these personnel will be adequate to accomplish the tasks
set forth in the plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Reporting Release No. 60, which was recently released by the
U.S. Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our consolidated financial statements include a summary of
the significant accounting policies and methods used in the preparation of our
consolidated financial statements.
Management believes the following critical accounting policies affect
the significant judgments and estimates used in the preparation of the financial
statements.
5
REVENUE RECOGNITION
Revenues are recognized at the time of shipment of the respective
merchandise. Our Company includes shipping and handling fees billed to customers
as revenues. Costs of sales include outbound freight. Products are under an
unconditional money-back guarantee for the first 30 days after purchase. A five
year warranty covering the repair of the unit is provided on all products.
USE OF ESTIMATES
Management's discussion and analysis of financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable and the carrying value of inventories and long-lived assets.
Management bases these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
RESULTS OF OPERATIONS
FOR THE THREE- MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002
AND 2001
(1) REVENUES. For the three months ended September 30, 2002, our
Company had $3,181,986 in revenue as compared to $739,847 in revenue for the
three months ended September 30, 2001, an increase of 330%. Sales of units of
our Internet access "hardware routers" for small offices and home users
increased to 24,317 for the three months ended September 30, 2002 from 4,639
units for the three months ended September 30, 2001, an increase of 424%.
For the nine months ended September 30, 2002, our Company had
$6,038,173 in revenue as compared to $2,275,018 in revenue for the nine months
ended September 30, 2001, an increase of 165%. Sales of units of our Internet
access "hardware routers" for small offices and home users increased to 41,626
for the nine months ended September 30, 2002 from 15,566 units for the nine
months ended September 30, 2001, an increase of 167%.
(2) COST OF SALES. For the three months ended September 30, 2002, our
Company had $1,802,858 (57%) in cost of sales as compared to $285,647 (39%) in
cost of sales for the three months ended September 30, 2001.
For the nine months ended September 30 2002, our Company had $3,156,262
(52%) in cost of sales as compared to $1,110,131 (49%) in cost of sales for the
nine months ended September 30, 2001.
(3) GROSS PROFIT. For the three months ended September 30, 2002, our
Company's gross profit was 43% as compared to 61% in gross profit for the three
months ended September 30, 2001. The gross profit decreased for the three months
ended September 30, 2002 compared to the corresponding period in 2001 due to
increased sales of a product with a lower margin to a customer in the technology
sector.
For the nine months ended September 30, 2002, our Company's gross
profit was 48% as compared to 51% in gross profit for the nine months ended
September 30, 2001. The decrease in gross profit for the nine months ended
September 30, 2002 as compared to the corresponding period in 2001 was mainly
due to sales of lower margin units sold in volume to a single customer.
(4) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001. For the three months
ended September 30, 2002, selling, general and administrative expenses decreased
to $795,742, as compared to $903,731 for the three months ended September 30,
2001. The decrease of $107,989 is the result of a decrease of compensation
option expenses by $210,000, an increase in compensation expense of $144,000, an
increase of other expenses by $22,000 and non-cash expenditure decreases in
amortization of unearned compensation of $63,000.
6
During the three month period ended September 30, 2002, the Company had
one transaction that resulted in non-cash selling, general and administrative
expenditures: i) $6,105 in option expenses to consultants. During the comparable
period in 2001, the Company had the following three non-cash transactions that
resulted in non-cash expenditures: i) the Company recorded a charge of $62,499
in connection with the issuance of common stock to the Chief Financial Officer
to amortize his unearned compensation in accordance with his employment
agreement; ii) the Company incurred an expense of $210,000 in connection with
the issuance of options to consultants; and iii) a company controlled by one of
our principal shareholders incurred research and development costs on our behalf
for the further development of our Internet access hardware routers for $73,000,
which was recorded as a capital contribution. The Company expects to increase
its selling, general and administrative expenses in the future in proportion to
the Company's anticipated growth in sales.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001. For the nine months
ended September 30, 2002, selling, general and administrative expenses decreased
to $2,201,808, as compared to $2,785,332 for the nine months ended September 30,
2001. The decrease of $583,524 is the result of a decrease of compensation
option expenses by $425,000, an increase in compensation expense of $203,000, a
decrease of out sourced R&D expense by $193,000, a decrease of legal expenses by
$88,000, an increase in other expenses of $23,000 and non-cash expenditure
decreases in amortization of unearned compensation of $104,000.
During the nine month period ended September 30, 2002, the Company had
the following three transactions that resulted in non-cash selling, general and
administrative expenditures: i) a charge of $83,340 in connection with the
issuance of common stock to the Chief Financial Officer to amortize his unearned
compensation in accordance with his employment agreement; ii) $21,043 in option
expenses to consultants; iii) amortization of loan closing asset of $4,342.
During the comparable period in 2001, the Company had four non-cash transactions
that resulted in non-cash expenditures: i) the Company recorded a charge of
$187,497 in connection with the issuance of common stock to the Chief Financial
Officer to amortize his unearned compensation in accordance with his employment
agreement; ii) the Company incurred an expense of $424,854 in connection with
the issuance of options to consultants; iii) a company controlled by one of our
principal shareholders incurred research and development costs on our behalf for
the further development of our Internet access hardware routers for $326,000,
which was recorded as a capital contribution; and iv) we issued 126,000 shares
of common stock to a consultant for services and recorded a non-cash transaction
of $88,578. The Company expects to increase its selling, general and
administrative expenses in the future in proportion to the Company's anticipated
growth in sales.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has relied principally upon the proceeds
of private equity financings and loans to fund its working capital requirements
and capital expenditures. For the nine months ended September 20, 2002, the
Company's net cash provided by (used in) operating activities was $365,876, as
compared to cash used in operating activities of ($860,319) for the nine months
ended September 30, 2001, an increase of $1,226,195. This increase in cash flow
resulted primarily from decreases in the Company's net operating loss on
increased sales during the comparable nine month periods.
For the nine months ended September 30, 2002, the Company's net cash
used by investing activities was $25,723, which was for purchase of property and
equipment.
For the nine months ended September 30, 2002, the Company's net cash
used by financing activities was $295,679. During the nine month period ending
September 30, 2002, the convertible debentures in the principal amount of
$255,000 were redeemed for $295,760 plus accrued interest of $16,240. In July
2002, an agreement with a stockholder was deemed to be fully performed and the
Company recorded the return and subsequent cancellation of 800,000 transfer
shares of common stock that were issued in a previous year.
The Company has no assured financial resources available to meet its
September 30, 2002 working capital deficit of $723,871 and future operating
costs.
ITEM 3. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL
CONTROLS. Within the 90 days prior to the date of this Quarterly Report on Form
10-QSB, the Company evaluated the effectiveness of the design and operation of
its "disclosure controls and procedures" (Disclosure Controls), and its
"internal controls and procedures for financial reporting" (Internal Controls).
This evaluation (the Controls Evaluation) was done under the supervision and
with the participation of management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO). Rules adopted by the SEC require that
in this section of the Quarterly Report we present the conclusions of the CEO
and the CFO about the effectiveness of our Disclosure Controls and Internal
Controls based on and as of the date of the Controls Evaluation.
7
CEO AND CFO CERTIFICATIONS. Appearing immediately following the
Signatures section of this Quarterly Report there are two separate forms of
"Certifications" of the CEO and the CFO. The second form of Certification is
required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certification). This section of the Quarterly Report which you are
currently reading is the information concerning the Controls Evaluation referred
to in the Section 302 Certifications and this information should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 (Exchange Act), such as this Quarterly Report, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
SCOPE OF THE CONTROLS EVALUATION. The CEO/CFO evaluation of our
Disclosure Controls and our Internal Controls included a review of the controls'
objectives and design, the controls' implementation by the Company and the
effect of the controls on the information generated for use in this Quarterly
Report. In the course of the Controls Evaluation, we sought to identify data
errors, controls problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our Quarterly Reports on
Form 10-QSB and Annual Report on Form 10-KSB. Our Internal Controls are also
evaluated on an ongoing basis by our independent auditors in connection with
their audit and review activities. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls and our Internal Controls and
to make modifications as necessary; our intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including with improvements and corrections) as conditions
warrant.
Among other matters, we sought in our evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in the
Company's Internal Controls, or whether the Company had identified any acts of
fraud involving personnel who have a significant role in the Company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of the Quarterly Report. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We also
sought to deal with other controls matters in the Controls Evaluation, and in
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each case if a problem was identified, we considered what revision, improvement
and/or correction to make in accord with our on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Quarterly Report, there have
been no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CONCLUSIONS. Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that material information relating to Nexland, Inc. and
its subsidiary is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared, and
that our Internal Controls are effective to provide reasonable assurance that
our financial statements are fairly presented in conformity with generally
accepted accounting principles.
RISK FACTORS
Our Company is subject to various risks which may materially harm our
business, financial condition and results of operations. Certain risks are
discussed below.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. For the nine months ended September
30, 2002, we had net income of $321,645. For the year ended December 31, 2001
and the year ended December 31, 2000, we sustained losses of $1.67 million and
$2.88 million, respectively. Future losses are likely to occur. Our independent
auditors have noted that our Company may not have significant cash or other
material assets to cover its operating costs and to allow it to continue as a
going concern. Our ability to obtain additional funding will determine our
ability to continue as a going concern.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR INDEPENDENT
AUDITORS
Our independent auditors have added explanatory paragraphs to their
audit opinions issued in connection with the 2001 and 2000 financial statements
which states that our Company is dependent on outside financing and has had
losses since inception that raise substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WE HAVE BEEN AND CONTINUE TO BE SUBJECT TO A WORKING CAPITAL DEFICIT AND
ACCUMULATED DEFICIT
We had a working capital deficit of $0.72 million at September 30,
2002. We had a working capital deficit of $1.3 million and $0.6 million at
December 31, 2001 and 2000, respectively. We had an accumulated deficit of $4.5
million at September 30, 2002. We had an accumulated deficit of $4.9 million and
$3.2 million at December 31, 2001 and 2000, respectively. Our ability to obtain
additional funding will determine our ability to continue as a going concern.
Accordingly, we may experience significant liquidity and cash flow problems if
we are not able to raise additional capital as needed and on acceptable terms.
No assurances can be given that we will be successful in reaching or maintaining
profitable operations.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
There has been a limited public market for our common stock and there
can be no assurance that an active trading market for our common stock will
develop. As a result, this could adversely affect our shareholders' ability to
sell our common stock in short time periods, or possibly at all. Our common
stock has experienced, and is likely to experience in the future, significant
price and volume fluctuations, which could adversely affect the market price of
our common stock without regard to our operating performance. In addition, we
believe that factors such as quarterly fluctuations in our financial results,
announcements by our competitors and changes in the overall economy or the
condition of the financial markets could cause the price of our common stock to
fluctuate substantially.
WE HAVE HAD A HISTORY OF A LIMITED CUSTOMER BASE AND THIS MAY CONTINUE
At present, our customer base consists primarily of Internet service
providers, telephone companies, enterprises, value-added resellers and Original
Equipment Manufacturing for technology partners. Our ability to operate depends
on increasing our customer base and achieving sufficient gross profit margins.
We cannot assure you that we will be able to increase our customer base or to
operate profitably. If any of our major customers stop or
9
delay their purchases of our products, our revenue and profitability would be
adversely affected. We anticipate that sales of our products to relatively few
customers will continue to account for a significant portion of our revenue. In
2000, sales to 10 customers accounted for 53% of our revenue, while in 2001,
sales to 10 customers accounted for 48% of our revenue. For the nine months
ended September 30, 2002, one customer in the technology sector generated 66% of
the Company's revenue. If these customers cancel or delay their purchase orders,
our revenue may decline and the price of our common stock may fall. We cannot
assure you that our current customers will continue to place orders with us,
that orders by existing customers will continue at the levels of previous
periods or that we will be able to obtain orders from new customers. Although
our financial performance depends on large orders from a few key customers and
resellers, we do not have any long-term binding commitments from any of them.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key
executives and consultants, including Gregory S. Levine, our President and a
Director of our Company, and Martin Dell'Oca, our Chief Financial Officer and a
Director of our Company. The loss of the services of any of these people could
materially harm our business because of the cost and time necessary to replace
and train such personnel. Such a loss would also divert management attention
away from operational issues. We have entered into employment agreements with
Mr. Levine and Mr. Dell'Oca, respectively. We do not maintain key-man life
insurance policies on any of these people.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The officers and directors of our Company believe that to the best of
their knowledge, neither our Company nor any of its officers and Directors are
parties to any legal proceeding or litigation. Further, the officers and
directors know of no threatened or contemplated legal proceedings or litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2002, our Company redeemed
convertible debentures in the principal amount of $255,000 for $295,760 plus
accrued interest of $16,240.
On November 22, 2000, the Company entered into a settlement agreement
in which it agreed to dismiss a threatened lawsuit against Fred Schmid, Fred
Schmid, Inc., Dale Runyon, a former principal shareholder of WindStar, and Erik
Nelson (WindStar parties), and to terminate Schmid's consulting agreement. In
this connection, Schmid and Nelson agreed to escrow the consulting shares and
the penalty shares with an Escrow Agent and Dale Runyon agreed to return 800,000
transfer shares of common stock that were issued to him in a prior year. In July
2002 the agreement was deemed to be fully performed and the Company recorded the
return of these shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. EXHIBITS
The following documents are incorporated herein by reference from the
Registrant's Form S-1 Registration Statement filed with the Securities and
Exchange Commission (the "Commission"), Commission file #333-3074 on April 1,
1996 and declared effective by the Commission August 16, 1996:
NUMBER DOCUMENT
- ------ --------
3.1 Articles of Incorporation.
3.2 Amended Articles of Incorporation.
3.3 Bylaws of the Company.
4.1 Specimen certificate for Common Stock.
4.2 Specimen certificate for Class A Redeemable Warrants.
4.3 Specimen certificate for Class B Redeemable Warrants.
The following documents are incorporated herein by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1997:
99.1 Stock Purchase Agreement.
99.2 Employment Agreement with Fred Schmid.
The following documents are incorporated herein by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1998:
11
3.3 Amended Articles of Incorporation dated December 31, 1997.
3.4 Amended Articles of Incorporation dated April 15, 1998.
The following documents are incorporated herein by reference from the
Registrant's Post Effective Amendment 1 to Form S-1 Registration Statement filed
with the Commission, Commission file #333-3074 on June 17,1998 and declared
effective by the Commission June 19,1998:
3.3 Amended Articles of Incorporation dated December 31, 1997.
3.4 Amended Articles of Incorporation dated April 15, 1998.
The following documents are incorporated herein by reference
from the Registrant's Form 8-K Report filed on December 3,
1999:
2. Acquisition Agreement and Exhibits attached thereto.
The following documents are incorporated by reference from the
Registrant's Post-Effective Amendment 2 to Form S-1 Registration Statement filed
with the Commission, Commission file #333-3074 on April 3, 2000.
10.1 March 14, 2000, Consulting Agreement between Nexland S.A.
and the Company.
10.2 November 17, 1999, Mutual Non-Competition Agreement between
Nexland, S.A. and the Company.
10.3 November 17, 1999 Co-Operation Agreement between Smerwick,
Ltd. and the Company.
The following documents are incorporated by reference from
the Registrant's Form 8K filed with the Commission,
Commission file #333-3074 on May 12, 2000.
10.4 Employment Contract of Enrique Dillon.
10.5 Employment Contract of Martin Dell'Oca.
The following documents are incorporated by reference from the
Registrant's Form 10-K filed with the Commission on May 14, 2001:
4.4 2000 Stock Incentive Plan
10.6 Promissory Note dated August 1, 2000, by the Company payable
to Israel D. Sultan
10.7 Conversion Agreement dated October 26, 2000, between Israel
D. Sultan and the Company.
10.8 Line of Credit Agreement dated March 19, 2001, between
Cornell Capital Partners, L.P. and the Company.
10.9 Registration Rights Agreement dated March 19, 2001, between
Cornell Capital Partners, L.P. and the Company.
10.10 Escrow Agreement dated March 19, 2001, between Cornell
Capital Partners, L.P., the Company, Butler Gonzalez LLP
and First Union National Bank.
10.11 Form of Convertible Debenture
10.12 Consulting Services Agreement dated March 19, 2001, between
Yorkville Advisors Management, L.L.C. and the Company.
10.13 Securities Purchase Agreement dated March 19, 2001, between
the investors on Schedule I attached thereto (the
"Investors") and the Company.
10.14 Registration Rights Agreement dated March 19, 2001, between
the Investors and the Company.
10.15 Placement Agent Agreement dated March 19, 2001, between May
Davis Group, Inc. ("May Davis") and the Company.
10.16 Escrow Agreement dated March 19, 2001, between May Davis,
the Company and First Union National Bank.
12
The following documents are incorporated by reference from the
Registrant's Form 10-Q filed with the Commission on November 14, 2001:
10.17 Employment Agreement, effective August 16, 2001, between the
Company and Robert W. Nelson.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2002 NEXLAND, INC.
/s/ Martin Dell'Oca
By:__________________________
Martin Dell'Oca
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Nexland, Inc. (the "Company") on Form
10-QSB for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of the undersigned,
in the capacities and on the dates indicated below, hereby certifies pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
/s/ Gregory S. Levine
________________________
Gregory S. Levine
Chief Executive Officer
/s/ Martin Dell'Oca
________________________
Martin Dell'Oca
Chief Financial Officer
14
CERTIFICATION
PURSUANT TO SECTION 302
I, Gregory S. Levine, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Nexland, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Gregory S. Levine
Date: November 14, 2002 By:___________________________
Gregory S. Levine
President
15
CERTIFICATION
PURSUANT TO SECTION 302
I, Martin Dell'Oca, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Nexland, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Martin Dell'Oca
By:____________________________
Martin Dell'Oca
Chief Financial Officer and
Principle Accounting Officer
16